Why Kimberley gas might burn Barnett again

Incredible amounts of gas have been found in the Canning Basin, but as WA Premier Colin Barnett has found out, it is not simply a cash cow waiting to be milked, writes Ben Collins.

Premier Colin Barnett's latest Kimberley project to pipe gas to the domestic market faces a serious economic hurdle according to a major academic study of Australian shale gas.

It's the same problem that sank Mr Barnett's other ambition for developing a gas-based industry in the Kimberley at James Price Point. Woodside's plans for an LNG processing plant north of Broome just didn't stack up economically. No amount of political pushing and shoving could get the controversial project, which was found to be too expensive, over the line.

Although Mr Barnett hasn't completely given up on James Price Point, acquiring the land in case an industry of the future decides they can afford to use the site, he has turned most of his attention to the onshore Canning Basin.

Underlying much of the western half of the massive Kimberley region, this vast sedimentary basin holds extraordinary amounts of gas that makes Woodside's Browse Basin interests look measly.

Premier Barnett was able to bounce back from his disappointment over James Price Point by signing a deal with Canning Basin gas and oil company, Buru Energy. The Natural Gas Agreement Bill was passed by the WA Parliament in June this year and provides Buru with long-term security of tenure on its Canning Basin tenements.

In return, the company has agreed to an ambitious deadline for making a final investment decision on building a pipeline from the Canning to the Pilbara by mid-2016. This pipeline would link to the Dampier to Bunbury pipeline, connecting the isolated gas resource to both domestic and international markets.

A colossal gas resource just a pipeline away from market sounds like money in the bank. As investors started to realise that Buru Energy was sitting on a mountain of gas in the Canning Basin, the share price soared. Buru Energy was the S&P/ASX 200 top performing company in the financial year to June 2012, with shares almost quadrupling in value. But since that time, and despite Buru moving towards commercialising a conventional oil find east of Broome, the share price has halved.

While there are myriad influences on energy resource markets including a softening of economic growth in China, the excitement over the incredible amounts of gas found in the Canning Basin is being tempered by the realisation that it is not simply a cash cow waiting to be milked.

Woodside's decision not to build an LNG processing facility on the Kimberley coast demonstrated the power of high costs in being able to derail a project. While Canning Basin gas resource estimates put it at one-and-a-half times bigger than all of WA offshore reserves, the catch is that the majority of Canning gas is unconventional gas.

Unlike the conventional offshore gas reserves where a well is drilled into porous gas bearing rock and the gas is drawn off, unconventional gas refers to gas locked in low-permeability rock. The rock needs to be fractured with high pressure fluid laced with sand and chemicals. Shale gas is typically much deeper than coal seam gas and requires deep and thus expensive wells. And this fracking may need to be done repeatedly, with wells possibly needed every square kilometre to release the gas.

The decade old boom in US unconventional gas is showing that while fracking may have inspired a movement opposing the process on environmental grounds, a bigger problem may be that unconventional shale gas is too expensive.

Unlike oil which is traded on a global market, gas markets are regionalised with different prices around the world. In 2008 the US market was paying $US12 per gigajoule ($US12/GJ). But with the flood of domestically produced unconventional gas, the US price crashed to $US$4/GJ in 2012.

A major study of Australian shale gas by the Australian Council of Learned Academies (ACOLA), a peak body representing the country's four Learned Academies made up of the nation's leading academics, found that at the current price, most dry shale projects in the US are not viable. This confirms what has been reported in US media since the initial excitement around their fracking industry has subsided. It means there's a lot of gas in the US looking for a better market which is why LNG exports from the US to Asia are on the cards.

But the possibility of competing with US gas exports in Asia is not the only challenge facing Australian shale gas. The ACOLA study found that while you need a high market price to make the costs of shale gas viable in the US, it's even more expensive to extract unconventional gas in Australia.

Rigs and skilled workers are more expensive and basic infrastructure like roads, water and power doesn't exist over much of our unconventional gas fields. The result is that Australian shale gas is three to four times more expensive to produce than US shale gas. The ACOLA study concludes that Australia's remote shale gas resources such as the Canning Basin probably aren't viable under short-term market prices unless they can also produce petroleum liquids such as condensate which attract higher prices.

But petroleum liquids aren't likely to encourage investment in a gas pipeline and Buru Energy has to convince shareholders and its joint venture partners to do just that by Premier Barnett's 2016 deadline.

The political risk is that the Canning Basin may be a longer term prospect for a future energy market prepared to pay higher prices. This could see it join the list of Kimberley gas projects that haven't made the grade under Premier Barnett's reign.

Inpex took their Browse development to Darwin shortly after Mr Barnett became Premier in 2008. Woodside have taken their Kimberley project offshore this year. With the next WA state election in early 2017, the Canning Basin could become a ticking time bomb for the Barnett Government.

Buru Energy and the Australian Petroleum Production and Exploration Association were contacted for this article but had not responded at the time of publication.

Ben Collins is the Cross-Media Reporter for ABC Kimberley. View his full profile here.